Study On The Chinese "Excessive Money Puzzle"

Since 1978, along with the fast economic growth, the Chinese M2/GDP ratio is keeping rising. In 2007,the ratio has peaked at 1.62,which was the highest one in the whole world. This"excessive"money supply coexists with lower price level, which is compounded with the classic Quantity Theory of Money, was characterized by the economist as"Chinese Puzzle"(Mckinnon, 1993). In the very beginning stage of economic reform, Marketrizing and Monetarizing were the main explanations of the phenomenon of"Chinese Puzzle", the economists mainly hold positive views towards the high value of M2/GDP ratio. The old Monetarizing theory was obvious not enough to explain the steadly growth of M2/GDP ration after the slow down of Moneytarizing progress in 1990s. The economists began correlated the high M2/GDP ration with the fast growthing capital market and some institutional factors of Chinese financial market, and began to worry about the risks behind the phenomenon. According to the exist researches, we can say the"Chinese puzzle"represents the most important institutional factor of economic growth and financial development. Keeping our eye sight on the"excessive"money problem, trying to give it reasonable explanation will be a long run project for Chinese economists, and bearing great meaning for understanding and judging the future economic and financial reform.Firstly, this thesis gives detail and systematic reviews of related monetary economics theory, and especially focus on Quantity theory of money and the Post Keynesian endogenous money. The latter one is the foundation for us understands the"puzzle"of Chinese"excessive"money. Besides it, we also review the existing researches and explanation about this problem and give our recommendations.Secondly, we examined the long term trend of M2/GDP rate and make a cross-country compare. We found that the M2/GDP ratio had a steady growth trend in the last 30 years. And through econometric test, we found the DGP(data generate progress) of M2/GDP ratio had no structure break down. The cross-country study confirmed the fact that china has the unique high M2/GDP ratio, and gave us some clues to further research.Third, according to the endogenous money theory, the central bank can't control the money supply, the fluctuation of M2 mainly influenced by the banking system's credit creating behaves which determined by the money demand. Based on the Chinese institutional characters, this thesis gives three theory assumptions. The first one is the government subsides assumption. According to the assumption, the government subsides and guarantees the banking system, which influences the credit creation behaves of bank, and eventually bring forth to the"excessive"money phenomenon. The structure of banking system also has some influence on the progress and result of"excessive"money creation. We modeled the assumption with a simple monopoly competition model. The second is a decentralized monetary issue right assumption. According to the assumption, the monetary issue right is decentralized to several local governments, through money issuing and taxation, local governments financing for investment to maximize local output. Modeled the assumption we found that the higher taxation cost the more money issue. The decentralized monetary issue right and competition of local government is the main reason why we have"excessive"money. The third assumption is the fortune preference theory. According to the theory, the higher the saving rate the larger the space for the central bank adopt active monetary policy to promote economic growth, and finally bring forth to the higher monetarizing level. Use a general equilibrium model we prove this theory hypothesis.Finally, through three hypothesis and the related practical examination, this thesis reaches to the following conclusions.(1)the government subsides and guarantees, which is given to the banking system may not enlarge the reserve base of banking system, but will promote the credit creation and bring to the"excess money"problem. (2)The local government's interfering into banking and the decentralized monetary issue right is the second reason why we have the"excessive money".(3)According to the two hypothesis, there is a sufficient condition for sustainable government finance and banking industry, that is constructing a totally market oriented banking system. First, we should push forward the banking reform; second we should reform the local government value system(or the local government officer value system). (4) The theoretical analysis also shows that there is a threshold level of monetarization, when the monetarization levels is less than the critical value, the money supply through the promotion of investment and thus promote the consumption and economic growth, an active monetary policy at this time to be effective. The wealth preference has great influence on the critical value, the higher of the wealth preference the higher the critical value is. It is clear that for countries with a high savings rate, the monetary authorities increase the money supply to promote economic growth in the effective policy space, which will certainly push up the level of monetarization (M / GDP ratio). (5) As a result of the existence of"excess" money, the central bank's choosing of the broad money M2 as intermediate target of monetary policy would be subject to doubt. In this thesis, we suggest to use monetary services index as the intermediate target of monetary policy instead of M2.